{"id":7060,"date":"2025-07-04T07:17:31","date_gmt":"2025-07-04T05:17:31","guid":{"rendered":"https:\/\/lundgreenscapital.com\/uk\/?p=7060"},"modified":"2025-07-04T07:17:31","modified_gmt":"2025-07-04T05:17:31","slug":"us-trade-policy-uncertainty-shakes-up-japans-recovery","status":"publish","type":"post","link":"https:\/\/lundgreenscapital.com\/uk\/us-trade-policy-uncertainty-shakes-up-japans-recovery\/","title":{"rendered":"US trade policy uncertainty shakes up Japan\u2019s recovery"},"content":{"rendered":"

The uncertainty surrounding US President Donald Trump\u2019s trade policies and his insistence on maintaining a strong dollar have sent shockwaves across global markets and stand to disrupt long-term growth strategies of various economies. These policies involve a flip-flopping between sky-high tariffs and calibrating unilateral trade deals, as well as the recalibration of long-standing economic alliances. For Japan \u2013 a developed economy heavily reliant on imported raw materials and merchandise exports \u2013 these developments cast doubt regarding the resilience of its fragile post-pandemic recovery.<\/p>\n

Standstill tariff negotiations<\/h3>\n

By far, Trump\u2019s tariffs have become the biggest major external threat to Japan\u2019s path to economic resurgence. Japanese firms, particularly in the steel industry<\/a>, have already felt the heat of the US\u2019 protectionist measures. The disruption, however, is not limited to steel. Accounting for over 20 per cent of Japan\u2019s total export value, the automobile industry is now also under stress with several carmakers projecting profit declines due to reduced exports amidst market uncertainties globally.<\/p>\n

In May, major carmakers<\/a> projected about USD 19 billion in losses directly attributable to the US-imposed tariffs. For instance, Honda<\/a> reported an over 70 per cent year-on-year drop for its fourth quarter operating income. This development highlights the vulnerability of Japan\u2019s export-dependent industries to external shocks. As recent data<\/a> from the Ministry of Finance show, the tariff also resulted in about 1.7 per cent year-on-year drop in total exports in May.<\/p>\n

Graph 1 shows the sharp downward trend in total exports since Trump announced additional import duties in March. There was also a decline in imports resulting from slower domestic demand and private investment, ushered in by the uncertainties.<\/p>\n

\"US<\/a><\/p>\n

Another threat to Japan\u2019s recovery is elevated energy costs. As the world’s fifth largest oil importing country, about 97 per cent of domestic oil consumption<\/a> were met using foreign sources in 2022, with about 90 per cent coming from the Middle East. An escalation of geopolitical conflicts in that region, the most recent being the escalation of the Iran-Israel attacks, potentially puts Japan at a disadvantage. However, the pro-oil rhetoric of Trump could rally increased demand for fossil fuels down the road, and this would benefit Japan through cheaper fuel.<\/p>\n

Japan\u2019s attempts to reach a diplomatic resolution to the US\u2019 24 per cent duty on Japanese goods have so far yielded little progress, even after three months of negotiations. In July, Trump even threatened to raise the tariff on Japan\u2019s exports to 35 per cent. Tariff talks with the US<\/a> regarding the 25 per cent duty on Japanese cars continue to put domestic automakers at a loss. Recent negotiations feature unrelated demands, such as pressuring Tokyo to buy more American rice<\/a>.<\/p>\n

As Japan continues to negotiate on diplomatic terms, China\u2019s combative approach with Washington resulted in even higher duties and counter-tariff measures. However, in just three months, US and China reached an agreement<\/a> and have reduced tariff rates significantly.<\/p>\n

Unless Japan can reach a deal by next week, the 24 per cent reciprocal tariff on Japanese products will go into effect \u2013 an added burden to Japan\u2019s domestic and international economic performance.<\/p>\n

Market signals<\/h3>\n

The Bank of Japan (BOJ) has gained relative confidence in achieving its inflation and growth targets thanks to domestic factors like improving wage growth and household spending. However, the positive impact has been modest: while the past two years saw wages hikes that have supported greater domestic consumption, such gains have been partly offset by a faster increase in consumer prices.<\/p>\n

The central bank offered a relatively optimistic outlook in January<\/a> as rising consumption is seen sustained, although at a moderate pace. However, the BOJ\u2019s April<\/a> economic outlook indicates that corporate profits are expected to decline due to slowing growth in key foreign economies. This could lead to a deceleration in wage increases and cause reduced household spending, stalling Japan\u2019s broader recovery. With external trade playing a key role in Japan\u2019s economy, its trajectory will be pulled by slower growth experienced by its trading partners, which include the US and China.<\/p>\n

Investor jitters have already manifested in domestic financial assets. Since Trump\u2019s return to office in January, Japan\u2019s 10-year government bond yield has increased while that of the US has declined, reflecting market response to uncertainties. These opposite trends signal capital flight from Japan and into US assets amid expectations of Trump\u2019s inward-looking policies. Trump branded higher tariffs as a way of boosting US employment and investments, although the very same policy has led to their economy shrinking<\/a> in the first quarter of 2025 as companies frontloaded importations.<\/p>\n

\"US<\/a><\/p>\n

Interestingly, Graph 2 shows a brief dip in Japan\u2019s bond yields between late March and early May, reflecting market sentiment that temporarily preferred the yen as a safe haven at the height of Trump\u2019s tirades and overall global trade uncertainty.<\/p>\n

Despite efforts of the Japanese government to stimulate growth through modest wage gains and attract more investments by raising interest rates from negative territory<\/a>, the country remains highly exposed to external shocks. Japan\u2019s vulnerability to Trump\u2019s uncertainty should be an important indicator for investors to watch out for. Import-dependent sectors such as utilities and transportation face cost pressures and possibly reduced profits, and while exporters may benefit from a weaker yen, reliance on the global supply chain continues to expose them to external risks.<\/p>\n

Despite these, we see important opportunities could emerge among firms catering to other emerging markets such as ASEAN economies, and in sectors less sensitive to tariff shocks and engaged in domestic demand such technology, health, and digital services, which continue to thrive.<\/p>\n

 <\/p>\n

 <\/p>\n

This original article has been produced in-house for Lundgreen\u2019s Investor Insights by on-the-ground contributors of the region. The insight provided is informed with accurate data from reliable sources and has gone through various processes to ensure that the information upholds the integrity and values of the Lundgreen\u2019s brand.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

The uncertainty surrounding US President Donald Trump\u2019s trade policies and his insistence on maintaining a strong dollar have sent shockwaves across global markets and stand to disrupt long-term growth strategies of various economies. These policies involve a flip-flopping between sky-high tariffs and calibrating unilateral trade deals, as well as the recalibration of long-standing economic alliances…. <\/p>\n

<\/div>\n

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